Eddie Lampert Hacks OSH - Is Sears Spinoff Spinning Out?

GuruFocus
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Almost a year ago, Sears CEO Edward Lampert owned 2,122,707 OSH shares — today he owns about half of that. As of March 25, 2013, Lampert reduced his position in Orchard Supply Hardware (OSH), a Sears spinoff, for the third time since last summer. For quarter ending June 30, 2012, the 10% owner Lampert had reduced his position by 22.7%, then again for quarter ending Dec. 31, 2012, Lampert reduced by 29.51%. His most current trade, reducing by 8.7%, leaves him with current shares of 1,080,204. The current price of OSH shares is $3.97, and according to GuruFocus analysis, is off 47% year to date.

What is going on with Orchard and its uber investor Guru Lampert, the mastermind of the Sears makeover? Orchard Supply Hardware is a David and Goliath story, but this time, there are many giants to battle. Orchard competes with home improvement and hardware heavies who have already figured out supply chain, pricing strategy and customer options. Orchard’s competitors include The Home Depot, Ace Hardware, Costco, Wal-Mart, Target, TrueValue and Lowe’s for house paint, garden tools, and other do-it-yourself products. Compare The Home Depot fiscal 2012 revenue of $70 billion to Orchard’s fiscal 2011 revenue of $660 million.

In February 2013, Orchard Supply Hardware reported that it had expanded its existing Senior Secured Credit Facility with Wells Fargo Capital Finance and Bank of America N.A., increasing their total borrowing capacity to $145.0 million through the addition of a $17.5 million last-in-last-out supplemental term loan tranche. Orchard also reported cash and available credit of $40 million, including $32 million available to borrow on the Senior Secured Credit Facility. According to the GuruFocus analysis of Orchard, the company may need that. In a recent financial and performance checkup, GuruFocus found one major warning sign, that the company’s earnings cannot cover its interest expense. (Ben Graham prefers a company’s interest coverage to be at least 5. If the situation continues, the company may have to issue more debt.) A good sign is that the OSH price ($3.97) is close to a two-year low of $3.94.

The bigger picture is that Sears Holding Corporation (SHLD) announced early this month a loss of $489 million with a six-month trend of declining sales. At that time, CEO Edward Lampert, also manager of ESL Investments, made two adds of SHLD, 2.91% and 0.79% at the average price of $44.17. As the mastermind behind the Sears makeover with the union of Sears and Kmart, Lampert now owns 43,845,246 SHLD shares, even as OSH is sagging. In other words, Lambert is heavily invested in his own projects at a down time.

Lampert’s company ESL Investments has a portfolio of 11 stocks with a value of $3.8 billion and a quarter-over-quarter turnover of 8%. Lampert’s portfolio is heavily weighted in consumer cyclical at 94.6%.

Lambert is 68th on the Forbes list of 400 Richest Americans.

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